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Income Inequality and Economic PolicyChapter 12
Economics of Global Business, 1st Edition, MIT Press Copyright © Rodrigo Zeidan 2018
In this Chapter
• Income versus wealth inequality;
• The elephant chart and the losers of globalization;
• Multidimensional poverty;
• Free trade and income inequality;
• Fossil fuel subsidies and social welfare;
• Universal basic income and its possible impact in the world.
Chapter 12.1 Income Inequality and Wealth
Inequality
Economics of Global Business, 1st Edition, MIT Press Copyright © Rodrigo Zeidan 2018
Wealth Vs. Income Inequality
Wealth inequality
Often mis-cited;
Not as concerning to many
economists;
Affected by changes in income
inequality;
Likely changes slower than
income inequality.
Income inequality
Measured by the Gini
Coefficient;
Concerning for economists;
Affected by tax structure,
economic growth, public
policy.
Gini Coefficient
Can vary from 0 to 1, with 0 being perfect income equality, when every
individual earns the same amount, and 1, extreme inequality, where one
individual gets all income from society. In reality, countries fall in
the 0.2 to 0.7 interval.
Income Inequality in Developed and Developing Countries
Developed Countries
Problematic because slower growth
can lead to growing inequality,
and upward distribution of
economic gains
Many developed countries have
policies designed to lower gini
coefficients
Norway--low Gini score for
developed country
USA--high Gini score for a
developed country
Developing Countries
Development often leads to worse
income inequality at first.
Terrible income inequality in
developing countries is often tied
to poor institutions and rampant
corruption.
Ukraine--low gini score for
middle-income country
Honduras--high Gini score for a
middle-income country
Income Inequality In Developed Countries
Problematic because slower growth can lead to growing inequality,
and upward distribution of economic gains
Many developed countries have policies designed to lower gini
coefficients
Norway--low Gini score for developed country
USA--high Gini score for a developed country
Income Inequality in Developing Countries
Development often leads to worse income inequality, so developing
countries (theoretically) should be less worried about income
inequality during developmental periods
Terrible income inequality in developing countries is often tied to
poor institutions and rampant corruption.
Ukraine--low gini score for poorer country
Honduras--high Gini score for poorer country
Kuznets Curve
The Kuznets Curve is a hypothetical representation of the idea that as
countries develop, economic inequality first increases, then decreases.
Hypothetical is an important qualifier, because it does not always hold
true.
Kuznets Curve
Countries by Gini Coefficient
Country Income Equal Country Income UnequalUkraine 0.25 Guinea-Bissau 0.51Slovenia 0.25 Rwanda 0.51Norway 0.26 Panama 0.52Czech Republic 0.26 Brazil 0.53Slovak Republic 0.27 Colombia 0.54Iceland 0.27 Lesotho 0.54Sweden 0.27 Honduras 0.55Belarus 0.27 Zambia 0.56Kazakhstan 0.27 Haiti 0.61Finland 0.28 South Africa 0.63
Top 10 Best and Worst Countries in terms of Income Inequality, 2010s (average)
Globalization and Income Inequality
Globalization is a boon to global economic growth, but it has
winners and losers
In developed countries, high-skilled, high income workers benefit
from globalization. Lower-skilled laborers tend to lose out as they
are more easily replaced by workers from elsewhere.
In developing countries, the effect is reversed.
Globalization can lower global income inequality while worsening it
in developed countries
Chapter 12.2Multidimensional
Inequality and poverty
around the world
Economics of Global Business, 1st Edition, MIT Press Copyright © Rodrigo Zeidan 2018
Multidimensional Inequality
Though income is the primary economic measure of inequality, income
inequality is not the only policy measure of inequality
There are other indices to check for the wellbeing of individuals
and the corresponding inequality between these wellbeing
Multidimensional Poverty index
Human Development Index
Multidimensional Poverty Index
DIMENSIONS
INDICATORS
Health Eduction Standard of living
NutritionChild Mortality
Years of schooling
Childrenenrolled
POVERTYMEASURES
Cooking Fuel Water Elitricity Floor Assets
Intensity of poverty
Headcountratio
Multidimensional Poverty Index (MPI)
Source: UNDP (2017).
Human Development Index
DIMENSIONS
INDICATORS
Long and health life Knowledge A decent stard of living
Life expectancyat birth
Mean years of schooling
Expected years of schooling
DIMENSION INDEX
Income per capta(PPP $)
Life expectanceindex
Incomeindex
Human Developing Index (HDI)
Educationindex
Source: UNDP (2017).
Important Global Trends
Extreme Poverty has been halved, globally
Income inequality has increased faster than consumption inequality--(leads
to wealthy individuals accumulating more savings, and worsening wealth
inequality)
Pressing problem for poor countries: Poverty
Pressing problem for middle income countries: Poverty and income
inequality
Pressing problem for developed countries: income inequality
Population in multidimensionalpoverty
Population living below incomepoverty line (%)
Survey Headcount Intensity of deprivation National poverty line PPP $1.25 a dayCountry (thousands) (%) 2004–2014 2002–2012Congo 2014 50,312 50.8 63.6 87.7Madagascar 2009 15,774 54.6 75.3 87.7Liberia 2013 3,010 50.8 63.8 83.8Burundi 2010 7,553 54.0 66.9 81.3Zambia 2014 8,173 48.6 60.5 74.3Malawi 2010 10,012 49.8 50.7 72.2Rwanda 2010 7,669 49.7 44.9 63.0Central African Rep. 2010 3,320 55.6 62.0 62.8Nigeria 2013 88,425 54.8 46.0 62.0Mozambique 2011 17,246 55.6 54.7 60.7Sierra Leone 2013 4,724 53.0 52.9 56.6Lesotho 2009 984 45.9 57.1 56.2Togo 2014 3,394 49.9 58.7 52.5
Muldimensional poverty in Africa.
Chapter 12.3Distributional Effects
of Monetary and Fiscal
Policies.
Economics of Global Business, 1st Edition, MIT Press Copyright © Rodrigo Zeidan 2018
Distributional Effects of Monetary Policy
Most economic policies have effects on inequality, if only
secondarily.
Improper monetary policy leading to inflation disproportionately
harms poorer people.
The end of hyperinflation in latin american countries led to
significant drops in income inequality across the region.
Distributional Effects of Fiscal Policy
Fiscal policy has more direct effects on inequality
Tax code and tax bracket structuring can be progressive, flat, or
regressive
Austerity measures (which often cut social safety nets) have
significant effects on worsening income inequality
Evidence suggests that spending adjustments have more direct effects
on equality than taxation measures
Case Study: Brazil’s Bolsa Familia
Conditional Cash Transfer;
Launched in 2004;
Transferred an average of $50 a month to 13.7 million families;
Cost less than 1% of GDP;
Aimed at bringing Brazilian people out of poverty.
Extreme poverty: family per capita income of U$34 per month.Poverty: per capita income of U$68 per month.Basic benefit: U$33 per month.Variable benefit based on pregnant women, children below 15years of age (conditional on schooling enrollment and 80%classes frequency): U$15 to U$32 per month.Teenagers up to 17 years: U$15 to U$32 per month.No family may receive more than U$100 per month
Bolsa Familia’s requirements and disbursements.
Source: Brazilian Ministry of Social Development (2017).
Bolsa Familia Results
Instrumental in taking millions out of poverty.
Helped bring Brazil’s Gini Coefficient from .596 in 2001 to .519 in
2012.
Should be phased out as Brazilian economy matures, but because of
its public popularity, it will be tough to remove.
Taxes, Climate Change and Income Inequality
Proposed taxes to address climate change and energy consumption
include carbon taxes, gasoline taxes, and more.
Such taxes ought to be pigouvian, but that is difficult to attain.
Taxes, Climate Change and Inequality
One source of inequality in developing countries is energy subsidies
These mainly benefit the wealthy individuals who consume more
energy sources.
Energy prices in developed countries are dependent upon relationship
between government and citizens:
U.S. gas prices are low, as places in the USA are spread out,
and most american families own cars. Public transportation in
the united states is underdeveloped as a result.
European energy prices are higher; less people drive; public
transportation is better
Gasoline Taxes: Progressive or Regressive?
The distributive effects of a gasoline tax depends on the development of
the country
Gasoline taxes in developed countries with many car drivers like the
United States are likely regressive.
This is because unless public transportation is available, lower
income Americans must spend a larger percentage of their income
on gasoline for transportation
Gasoline Taxes: Progressive or Regressive?
Gasoline taxes in developing countries can be progressive, because
those with automobiles in developed countries often are upper-middle
to upper class
Pigouvian Taxes
Taxes levied on a market that generates negative externalities set
equal to the social cost of those negative externalities
Could be used to address pollution
Great in theory; difficult to calibrate properly
Chapter 12.4 Trade Inequality and
Politics
Economics of Global Business, 1st Edition, MIT Press Copyright © Rodrigo Zeidan 2018
The Elephant Chart
Created by Branko Milanovic in 2013.
Compares real income growth of global population
in 1988 and 2008.
Population is divided by income percentile (from
the poorest 10% to the richest 10%).
Demonstrates that nearly all percentiles of people
saw their real income increase substantially over
the 20 years, with the exception of the 80th
percentile of global income, whose income
stagnated over the two decades.
Source: Resolution Foundation (2017), after Christoph Lakner and Branko Milanovic (2013).
The Elephant Chart
Why the American Middle Class has Stagnated
Combination of Trade, technology, and global productivity gains
Productivity gap between average american worker and global workers
has shrunk
Companies can more easily move production overseas, to cheaper labor
The Decline of the Global Middle Class?
The American middle class was simply the first, not the only
population to experience this stagnation
Wage stagnation in the U.S.A. and the EU has led to various
populist, anti-immigration and protectionist movements
As its economic growth slows, China is currently worried about
middle-class wage stagnation and discontent in the near future
Middle-class frustrations played a role in the Arab Spring
Chapter 12.5 Inequality and
Macroeconomics Redux
Economics of Global Business, 1st Edition, MIT Press Copyright © Rodrigo Zeidan 2018
Economics and Inequality
Major economic decision makers chase economic growth, low inflation
and low unemployment before they address inequality.
Nonetheless, economic policies are not distributively neutral.
Income distribution is multidimensional:
Arises from labor market interactions,
Affected by: inflation, past wealth (endowments), rate of human
capital accumulation, saving profiles, taxation, demographics,
rate of innovation, amount of insurance against shocks and
more.
Economics and Inequality
Inequality is different from inflation and unemployment:
Not all rises in inequality are necessarily bad.
Gini Coefficients change gradually:
It can take decades for national inequality to change
dramatically.
Good Read: “Capital in the 21st Century”
Thomas Piketty-- Capital in the 21st Century.
Thesis: the main driver of inequality is that the return on capital
exceeds economic growth.
This trend creates ever widening inequality, further destabilizing
democracy and the social contract.
These trends aren’t inevitable or irreversible.
Smart public policy can curb worsening inequality.